Flaherty needs to address long-term challenges, notably the aging population

Finance Minister Jim Flaherty will present his next budget on Thursday.

Photograph by: THE CANADIAN PRESS/Fred Chartrand
, Postmedia News

As he approaches his eighth and possibly final budget, Jim Flaherty will no doubt be thinking about his legacy, the last acts that will shape how he’ll be remembered. The air is thick with leaks, speculation and flat-out guesses of what he might have in mind: from reclaiming federal funds for job training from the provinces, to sweeping tax reform, to more prosaic measures like trimming the federal public service.

These are all worthy suggestions, but what will be noticed about all of them is that they amount to undoing the damage done in Flaherty’s first seven budgets. It was Flaherty, after all, who first handed the training envelope over to the provinces in the 2007 budget, with results that have evidently been unsatisfactory.

It was under Flaherty that the federal payroll ballooned to a record 380,000 employees — nearly a third higher than in 2000 — as it was Flaherty who tarted up an already complex tax code with all sorts of frilly tax credits, for children’s fitness and the like. The finance minister will wish to be congratulated for balancing the budget sometime in the next two years, but it was this finance minister who plunged us so far into deficit, needlessly, in the first place.

But never mind. Historically, for a minister merely to leave the nation’s finances in no worse shape than he found them — the debt-to-GDP ratio will come in this fiscal year, on current projections, at almost exactly the same level as it was in Flaherty’s first year — would count as something of a legacy. If he really wants to do something historic, however, he’ll be thinking less about collecting plaudits in the short term and more about addressing the longer-term challenges facing the country, notably (sorry to beat this drum again, but yes) the aging population.

Certainly the federal deficit, about which you will hear a great deal in coming days, is the least of our problems. A bit of mild restraint and modest growth in revenues have already cut it to a projected $26 billion for the fiscal year just ending, itself almost certainly an overstatement (it was just $13 billion over the first nine months of the fiscal year). Even a slowing economy and falling commodity prices are unlikely to throw the government much off track. While Thursday’s statement will probably stick to the government’s (latest) target of a balanced budget by 2015-16, the C.D. Howe Institute calculates, in its annual Shadow Budget, that it could be done a year ahead of schedule, by means of cuts in program spending totalling roughly 3¢ on the dollar.

Given the uncertainty abroad, there’s probably something to be said for offering nervous investors whatever reassurance we can. But I can’t see it much mattering either way. We do not all turn into pumpkins if the budget misses comes in $2- or $3-billion to the bad; neither would cuts of a few billion dollars in government spending do much to hold back an economy that is about to hit the $2-trillion mark.

Indeed, even in the longer term, the fiscal burden of population aging, while unarguably weighty, will fall mainly on the provinces. That’s thanks in part to measures the federal government has taken to insulate itself, again (credit where credit is due) on Flaherty’s watch: last year’s package of pension measures, as well as the caps imposed on the growth of federal-provincial transfers.

So while there can be no letup on restraint, the finance minister can focus less on balancing the budget in the short term than boosting growth in the long term. This isn’t an argument for more “stimulus.” Indeed, there is little governments can do to actively promote growth, short-term or long. But there is plenty they can do to remove impediments to it, especially where these were largely their own handiwork.

To get the growth we need, we’re going to need more of both labour and capital. Changes to Old Age Security and Employment Insurance, while modest, will help on the labour-supply front, encouraging more workers to make themselves available, for longer. Changes to immigration rules will help, particularly with regard to emerging shortages of skilled workers, as (the government must hope) will whatever changes to training are unveiled in the budget.

It’s on the capital side where more needs to be done. To be sure, corporate tax rates have been coming down (again, credit where etc). But personal tax rates remain relatively high: the government chose, disastrously, to cut the GST instead. And whatever harm is done by high tax rates, it is compounded by the variance in rates, owing to the proliferation of deductions, preferences and credits: between different industries, different types of firms, even different products.

The effect of these “tax expenditures,” as they are called, is to make decisions on whether to invest in a given project depend less on the real economic returns it offers, and more on the tax goodies attached. The same applies to subsidies of a more explicit kind, the vast archipelago of “grants and contributions,” zero-interest loans and so on with which the government entices capital this way and that, on the theory that investment is too important a matter to be left to investors.

A “bonfire of the vanities,” whether on the tax or spending side of the ledger, would be the biggest single contribution the finance minister could make to future prosperity. But then, if he believed in any of this he’d have done it by now.

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